Palgrave Macmillan Studies in Banking and Financial Institutions

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1 Palgrave Macmillan Studies in Banking and Financial Institutions Series Editor: Professor Philip Molyneux The Palgrave Macmillan Studies in Banking and Financial Institutions are international in orientation and include studies of banking within particular countries or regions, and studies of particular themes such as Corporate Banking, Risk Management, Mergers and Acquisition. The books focus is on research and practice, and they include up-to-date and innovative studies on contemporary topics in banking that will have global impact and influence. Titles include: Vincenzo Formisano NON-KNOWLEDGE RISK AND BANK-COMPANY MANAGEMENT The Role of Intangibles in Rating Models Bernardino Quattrociocchi INTERNAL RATING SYSTEMS AND THE BANK-FIRM RELATIONSHIP Valuing Company Networks Miao Han CENTRAL BANK REGULATION AND THE FINANCIAL CRISIS A Comparative Analysis Pierluigi Ciocca STABILISING CAPITALISM A Greater Role for Central Banks Anabela Sérgio (editor) BANKING IN PORTUGAL Michele Modina CREDIT RATING AND BANK-FIRM RELATIONSHIPS New Models to Better Evaluate SMEs Jes Villa ETHICS IN BANKING The Role of Moral Values and Judgements in Finance Dimitrios D. Thomakos, Platon Monokroussos & Konstantinos I. Nikolopoulos (editors) A FINANCIAL CRISIS MANUAL Reflections and the Road Ahead Elena Beccalli and Federica Poli (editors) BANK RISK, GOVERNANCE AND REGULATION LENDING, INVESTMENTS AND THE FINANCIAL CRISIS Domenico Siclari (editor) ITALIAN BANKING AND FINANCIAL LAW Supervisory Authorities and Supervision INTERMEDIARIES AND MARKETS Crisis Management Procedures, Sanctions, Alternative Dispute Resolution Systems and Tax Rules

2 Fayaz Ahmad Lone ISLAMIC FINANCE Its Objectives and Achievements Valerio Lemma THE SHADOW BANKING SYSTEM Creating Transparency in the Financial Markets Imad A. Moosa GOOD REGULATION, BAD REGULATION Elisa Menicucci FAIR VALUE ACCOUNTING Key Issues Arising from the Financial Crisis Anna Omarini RETAIL BANKING Business Transformation and Competitive Strategies for the Future Palgrave Macmillan Studies in Banking and Financial Institutions Series Standing Order ISBN: (outside North America only) You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England

3 The European Banking Union Supervision and Resolution Giuseppe Boccuzzi Director General, Interbank Deposit Protection Fund, Italy

4 Giuseppe Boccuzzi 2016 Softcover reprint of the hardcover 1st edition All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6 10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act First published 2016 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number , of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin s Press LLC, 175 Fifth Avenue, New York, NY Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave and Macmillan are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN ISBN (ebook) DOI / This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Boccuzzi, Giuseppe. The European banking union : supervision and resolution / Giuseppe Boccuzzi. pages cm. (Palgrave Macmillan studies in banking and financial institutions) Includes bibliographical references. 1. Banks and banking State supervision European Union countries. 2. Banking law European Union countries. 3. Banks and banking European Union countries. 4. Financial crises European Union countries Prevention. I. Title. HG1778.E85B dc

5 Contents List of Figures Preface Prologue ix x xii Introduction 1 Some preliminary observations on the new legal framework 6 1 The Financial Crisis and the Banking Union Project 13 1 The weakness of the institutional framework for managing banking crises before the financial crisis 13 2 The first timid (and difficult) attempts to regulate banking insolvency 14 3 The answer to the financial crisis: the Banking Union project 18 2 The First Pillar of the Banking Union: The Single Supervisory Mechanism 23 1 The evolution of banking supervision at the European level The first phase: the reform of regulation procedures (the Lamfalussy system) and the logic of co-operation and coordination in banking supervision The second phase: strengthening international co-operation and the creation of European supervisory bodies (De Larosière project) The point of arrival: the centralisation of supervisory functions (the Single Supervisory Mechanism) 30 2 The Single Supervisory Mechanism: the legal and institutional profiles The division of responsibilities between the ECB and national supervisory authorities The potential conflict of interest between supervisory and monetary policy functions: the independence and separation principles Relations with the EBA The organisation of shared supervision The preparatory stage of the SSM The role of the ECB in banking crisis management 43 v

6 vi Contents 3 The European Reform of the Rules for Banking Crisis Management: The Bank Recovery and Resolution Directive 48 1 The new European rules for crisis management 48 2 The setting up of National Resolution Authorities 50 3 A significant innovative theme: the handling of cross-border group crises: the establishment of Resolution Colleges 51 4 A new strategic approach: towards a complete and integrated vision to deal with crisis phenomena Preparatory and preventative measures Recovery plans Resolution plans Early intervention Definition of triggers for intervention Choice of early intervention tools Resolution Triggers for resolution action Powers of the resolution authority Resolution tools Government financial stabilisation tools Safeguards for third parties Liquidation 99 5 Financing resolution. The establishment of the Bank Resolution Fund (BRF) Funding mechanism The use of bank resolution funds Intervention of deposit guarantee schemes in the resolution Recourse to the European Stability Mechanism (ESM) A challenge for the future: the harmonisation of insolvency regimes The Second Pillar of the Banking Union: From the National Resolution Authorities to the Single Resolution Mechanism The regulatory path towards the centralisation of crisis management Conferring tasks on the Single Resolution Board: the legal basis Decision-making process in resolution: a fractious, perhaps inevitable, system The setting-up of a Single Resolution Fund Financial resources and the funding mechanism of the Single Resolution Fund 124

7 Contents vii 4.2 The Intergovernmental Agreement on transfer and mutualisation of resources to the Single Resolution Fund Contribution mechanism to the fund Relations between the SRF and the Deposit Guarantee Systems The Third Pillar of the Banking Union: The Pan-European Deposit Guarantee Scheme The role of deposit guarantee schemes Directive 94/19/EC DGSD reform: from minimum to maximum harmonisation The reform process and general lines of regulatory intervention Main aspects of the reform Scope of guarantee, payout procedures and timeframe Stress testing of deposit guarantee systems Financial means and funding mechanism of DGSs Use of funds Institutional Protection Schemes Co-operation and exchange of information between DGSs and other authorities within the safety net Cross-border co-operation Banking Crises and State Aid Discipline State aid general rules The special discipline for the financial sector The 2013 Communication of the European Commission The burden-sharing principle and the need for a bank restructuring plan Recapitalisation and impaired asset measures Guarantees and liquidity support Intervention of Deposit Guarantee Schemes (DGSs) Aid to bank liquidation The rationale for EU action: the growth target Conclusions The implantation of the new European regulations on banking crisis management in national legislations 165

8 viii Contents 2 The identification of the resolution authority The scope and the use of tools: the flexibility of the Directive and the left to Member States for discretionary measures The safeguards for subjects affected by resolution measures DGSD implementation: national legislative choices 173 Notes 176 Bibliography 208 Index 217

9 List of Figures I.1 New configuration of the safety net Banking Union: three pillars and a single rulebook Banking Union: the single rulebook European System of Financial Supervision (ESFS) Single Supervisory Mechanism Authorities in the Resolution Colleges and in the Crisis Management Groups (CMGs) New framework for bank recovery and resolution: an integrated approach Governance: the central role of the risk appetite framework Recovery plans Global Loss Absorbency Capacity (GLAC) SPE and MPE resolution Resolution plans Early intervention tools Triggers for resolution Resolution tools Depositor preference Exclusions from bail-in Public interventions in resolution National bank resolution fund: funding Single Resolution Fund: the funding mechanism Resolution in the EU and in the Eurozone DGS mandates The current Italian DGS intervention system Funding of deposit guarantee schemes Use of deposit guarantee schemes in the new directive Forms of state aid in the 2013 communication Temporary administrator and special management 169 ix

10 Preface The global financial crisis all but brought down the financial system and real economies of industrial countries. It immediately became clear that reforms of both banking crises management and banking supervision should take centre stage, in order to re-regulate the whole banking system, including measures to remedy the deep cracks that the crisis uncovered. The policymakers goal was to render the European regulatory and institutional framework robust and efficient. The project was the Banking Union, a broadside approach to resolve the structural fragmentation and distortions in the European banking system that were the major obstacles to a working single market for financial services. The reform is far-reaching. It is designed to tackle the institutional architecture of banking supervision and crisis management, the powers of the authorities, the tools for administrative actions, the complexities of business and bankruptcy laws, individual rights and their legal guarantees. This volume examines the numerous changes happening to European legislation for the prevention and management of banking crises. What emerges is a changing picture of regulations and institutions, of goals and tools and of implications of the changes on the various stakeholders, both public and private, at European and national level. The book focuses on the new framework for banking crisis management. Inevitably, it has to start from the very foundation banking regulations and supervision because interventions in crisis management are possible only with reforms of banking supervision that are parallel and in tandem. The new framework for supervision and crisis management is devised to operate at the same Europe-wide level. If this were not the case, we would have divisions with supervisory responsibilities implemented at the European level and crisis management at the national level, with consequent serious distortions in decision-making and difficulties in carrying out interventions. It is my hope that this volume will be of use to market operators, researchers and students of banking, finance and law by providing them with a picture of the main features of the legal and institutional changes being brought on by the reform of banking rules. My aim is to describe and consider the salient points and by this means to stimulate further discussion and more in-depth analysis into the new European x

11 Preface xi regulatory framework, which will characterise the industry for many years to come and have profound effects on economy and society. I would like here to express my very sincere gratitude to Professor Riccardo De Lisa, Professor Christopher Neenan and Dr Manuela De Cesare for their precious comments and advice.

12 Prologue The financial and economic crisis of struck like an iceberg in the night. In its wake, banking insolvencies multiplied with disastrous effects on the financial system and, consequently, catastrophe for the real economies in industrialised countries. The need was urgently felt for a profound rethink and reform of how banking crises are managed and how banking supervision is conducted. The crisis had uncovered severe weaknesses in the financial edifice. The intention of policymakers became to put in place a more robust and effective regulatory and institutional system for Europe. They named it the Banking Union, an ambitious project to resolve the fragmentation and distortions in the banking system that militate against the creation of a single European market for financial services. The changing nature of markets and intermediaries, the complexities of risk and the interconnectivity between financial firms and the increasing exposure to contagion increased the urgency of the task. However, even before the onset of the present crisis, globalisation and technological advances had already opened the debate on initiatives for a reform of banking regulations and insolvency management. The divide between intermediaries acting internationally and a regulatory system still anchored at national level was widening with every passing month. The dangers for the banking system were very much in evidence and should have been heeded more closely. With hindsight, this second great crisis was there in the wings waiting to happen. Lehman Brothers was the first bank of systemic proportions to be let go by the US authorities. The consequences were near catastrophic for global banking. In the aftermath, many questions were raised about why that should have been the only insolvent bank allowed to go belly-up in an environment characterised by bank rescues underwritten by taxpayers money. These questions remain without convincing answers even to this day. 1 In 2011, in the midst of the new problems and financial turbulence rendered worse by the perverse link between banking risk and sovereign risk, I published in the Bank of Italy s Legal Studies Series an extended analysis of banking crises in the light of the very serious developments in the US and in Europe and in the context of the new forms the crisis was taking. 2 I examined causes of banking failure, its manifestations xii

13 Prologue xiii and the extraordinary solutions invented by various jurisdictions to find a remedy for it. I highlighted a common thread running through all these solutions: bank insolvency was being tackled by bail-outs using public monies and in many ways (recapitalisation, asset relief programmes, nationalisation, guarantees, bad banks into which toxic assets were sent). The costs of the failures were being taken on to State balance sheets and, in the last resort, paid for by the taxpayer. At the time, reform of the financial system was underway in the United States and in Europe. Some countries had already brought in major changes. Many of the regulations and institutions now being implemented as part of Banking Union were still being worked out in theory. Given their highly complex nature, the potential consequences were being carefully studied. In the meantime, regulatory and organisational solutions intended to enhance international co-operation and coordination of supervision and management of banking group crossborder crisis were seen to be inadequate. The main concern of policymakers was not simply to add to the box of tools to be used in crisis situations but rather to come up with institutes and instruments capable of warding off any future recurrence of a major systemic crisis. Policy and strategy were focused on having a wide field of interventions that would either strengthen prevention (by means of more stringent prudential rules and more in-depth oversight controls) or completely revisit the rules and methods of crisis management. In Europe, numerous well-directed legislative initiatives were begun. My choice of title for the 2011 publication, Towards a New Framework for Banking Crisis Management, was designed to reflect my sense that while the process of change had effectively begun, the concrete issues had only been sketched out and no finishing line was yet in sight given the signal complexity of the issues and the extreme differences in institutional and regulatory frameworks from one country to another in Europe and all their different approaches. Perhaps there was more than a touch of skepticism in my tone, in part created by difficulties in the past particularly in the 1990s, in the search for a common framework for banking crisis management, which had in fact resulted in a very bland and toothless directive on the resolution and liquidation of banks that more or less left all countries to their own devices, rules and tools. Even the last chapter in that book Where are we going? continued in the same vein. It expressed a fair amount of doubt that the initiatives

14 xiv Prologue being undertaken would reach any concrete conclusions, together with no small pessimism about the real will and capacity of governments to embark on any genuine reforms in the short term. Subsequent events helped partly to allay these doubts. The European authorities charged with regulating the financial system showed themselves quite determined to repair the cracks caused by the financial earthquake and the lack of an adequate regulatory framework, even though different positions emerged on many essential features during the work towards reform. Up to the very end, there persisted points and positions of intense debate. Solutions could only be reached through compromise. This was especially the case when decisions had to be made about a common pooling of funds for crisis management (the Single European Resolution Fund, Single Deposit Insurance System, European Stability Mechanism). To achieve the targets set, we can say that the work is still ongoing at European and national levels. Still, questions remain about the completeness of the measures being adopted. Specifically, are they enough to provide a full answer to the structural problems exposed by the present crisis and any problems that could arise in the future? Of course, no set of rules or supervisory structures, however effective, will be able to ward off bank insolvencies in the future given the multitude of variables, internal and external, that could trigger crisis situations, including management behaviour and regulatory error. Has a limit really been set for the excesses that lay at the origins of the turmoil that shook the edifice of global finance? Have we tackled all the basic causes? Are the new rules well focused, in the sense that they target operators of highest systemic risk, or are they too broad-based, aimed at all intermediaries indiscriminately, big and small, whether in traditional banking business or speculative financing? In this book, I continue the analysis and investigation begun in the 2011 book. I examine the many innovative aspects of the European regulatory framework as now defined with the approval of regulations, directives and technical rules for the management of banking crises. The road ahead has been clearly mapped out; the reform lays out the steps to follow for prevention and resolution of a banking crisis through every stage of its gestation. What is available is a collection of regulatory and institutional changes, aims, instruments and considerations for the various stakeholders, public and private, European wide and national in the business of banking. In this volume, I focus on the new system for managing banking crises. Obviously, I begin from the very foundations, banking law and

15 Prologue xv supervision: it is from these that the work done on crisis management was possible, through a parallel and tandem reform of the rules of banking supervision. The new model for banking supervision and crisis management exists at the same level, namely European and it could not be otherwise. The alternative is a division of supervisory responsibility, implanted at European level and exercised at national level with all the consequent distortions for the decision-making process and difficulties for carrying out interventions. Banks could no longer be permitted to be European in life but national in death. The reform process is underway and is far-reaching. It takes in the institutional architecture of banking supervision and crisis management, the powers of the authorities and the tools for administrative intervention, with all the implications for business law and bankruptcy law, for rights and the legal guarantee of those rights. This volume is aimed at all those with an interest in banking crisis management, operators, experts, researchers and students of banking and finance. It seeks to provide them with an overview of the main aspects of the various legal institutes and institutions created by the reform and to suggest further points for discussion and investigation of the new European framework. It is my view that this reformed system will have a long life, just like all major reforms that follow in the wake of major upheavals to economic and social life. It will last... until the next great crisis. The book is structured as follows: Chapter 1 outlines the lack of an adequate regulatory framework in the pre-crisis period and follows the subsequent steps in the evolution of supervision and crisis management up to the eve of Banking Union. Chapter 2 describes the new supervisory architecture for Europe, the Single Supervisory Mechanism and specifically the supervisory powers of the European Central Bank. Chapter 3 examines the new legal framework for banking crisis management and the harmonised system of institutions and instruments for Europe. Chapter 4 explores the centralised European institutional framework for banking crisis management. Chapter 5 illustrates the innovations brought in by the new EU directive on deposit guarantee, which aims at reaching the maximum degree of harmonisation possible. Chapter 6 tackles the question of State aid in the banking sector. Finally, Chapter 7 deals with the main issues and problems for the transposition of the new crisis management framework into national jurisdictions.

16 xvi Prologue Notes 1. For an explanation of what happened on September 2008, see D. Smith, The Age of Instability: The Global Financial Crisis and What Comes Next, Profile Books Ltd., 2010; A.R. Sorkin, Too Big to Fail and The Inside Story of How Wall Street and Washington Fought to Save the Financial System and Themselves, Penguin Group, 2009; Mc Donald-Robinson, A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers, Crown Business, New York, 2010; V. Acharya, M. Richardson, Causes of the Financial Crisis, Critical Review: A Journal of Politics and Society, Vol. 21, Issues 2 3, More recently, T.F. Geithner, Stress Test: Reflecting on Financial Crises, Crown Publishers, 2014; J.F. Bovenzi, Inside the FDIC: Thirty Years of Bank Failures, Bailouts, and Regulatory Battles, Wiley, G. Boccuzzi, Towards a New Framework for Banking Crisis Management: The International Debate and the Italian Model, in the series Legal Research Papers of the Bank of Italy, October 2011.